News from European economic analysts is not very uplifting. Data show growth is as anemic as it has been for the last few years. It is somewhat encouraging that things are not worse than this, as some had expected the eurozone to sink into recession by this time. Instead, it has experienced some slight growth—about 0.3%.
That Europe has not entered a formal recession is cold comfort as the pace of growth is far too slow for any real recovery in the majority of the region. Germany’s struggles are the most distressing part of the data. If the engine of Europe falters, there is faint hope for the rest of the region.
The expectation had been growth of 0.4%—the same rate as had been registered last month. That growth, being even more anemic than had been expected, comes as a blow to those who have been looking to see European recovery at some point in the coming year. At this point, three reasons are cited for this reduction in activity.
The first and likely the most direct is that China has slowed; and with that retreat, Germany and some of the other markets have lost an important destination for their exports. Germany has been especially active as far as selling to China and has taken its slowdown harder than most. Not only does Germany have a significant stake in the Chinese economy, it also does a great deal of business with the Asian states, which used to sell a lot to China. If the Chinese aren’t buying their output, they are not buying much from German or any of the other eurozone economies.
The second issue for the reduction in growth has been the wave of migration from the Middle East and North Africa. There have been obvious and not so obvious impacts. There is the sheer cost of taking care of the refugees—an expense that has only just started to build. It is estimated that Europe will host close to one million refugees this year and as many as three million in the next two years. That assumes that nothing happens to stem the rush. This is straining budgets and will continue to affect the poorest states in Europe as they are the first point of arrival for the majority of those seeking to come to Europe. The less obvious impact has been on business. Travel is now very hard, and that has interrupted tourism as well as business trips. There is real confusion as to what happens next, and that has the consumer in Europe more than a little nervous.
The third issue is lack of internal demand, which tracks back to the major economies in the eurozone—Germany and France. The U.K. is not part of the eurozone, but it plays a big part in the European economy. These are the states that provide demand for the other states in Europe. Without the Germans and the French, the other nations have little or no domestic opportunities for growth.
It is likely these bad numbers will provoke a response from the European Central Bank (ECB). The thinking at this stage is that Mario Draghi will announce an expansion of the quantitative easing program launched earlier this year. It is also possible that the very low interest rates will be lowered even further. Frankly, the ECB has just about run out of ammunition. At some point the legislatures of the region are going to have to consider reversing their position on austerity. This is not going to be an easy switch to accomplish, and right now it seems exceedingly unlikely despite the intense pressure.
- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence